Economic relapse threatens lasting damage

The Great Recession hit a nation that was flying high, but the current slowdown is striking a nation already on its economic knees.

Job seekers line up to see recruiters during a career fair in Plano, Texas,… (LM Otero, Associated Press )

Reporting from Washington — Even if the U.S. economy avoids sliding back into recession, the continuing weakness is beginning to inflict long-term damage on many families and businesses that will make a full-blown recovery much harder to achieve.

The devastating recession that started four years ago hit a nation flying high on a housing boom and helium-inflated clouds of consumer spending. But the current slowdown is striking a nation already on its economic knees.

"That's the danger right now: You've got an economy that didn't recover," said Ethan Harris, Bank of America's chief economist for North America.

"We've had some healing," he said, noting that banks are in better financial shape, as are some households. "But the rehabilitation hasn't been completed," and a relapse would be like "hitting an already sick patient."

On Friday, Federal Reserve Chairman Ben S. Bernanke is expected to discuss the economic outlook and the central bank's role in the months ahead, but he is unlikely to announce any immediate policy changes despite widespread anticipation of new action.

Also, new numbers scheduled to be released Friday on overall economic growth are not expected to brighten prospects.

What worries economists such as Harris is that an economy that shows little or no growth does more than cause immediate pain. It inflicts damages and costs that have lasting effects.

The last recession, which technically ended in June 2009, was the worst in six decades. It cost the country about $2.5 trillion, including the government's stimulus spending, losses at mortgage lenders Fannie Mae and Freddie Mac, and additional funds for unemployment benefits, according to Moody's Analytics.

As the weak economy lingers, the tab to taxpayers will keep growing and put additional pressure on the already strained fiscal budget. Additionally, the lost income, lost business opportunities and other private-sector costs were far higher.

Economists worry about the possibility that the growing disparity between the rich and everybody else will widen, that the nation's entrepreneurial energy will be sapped and that a generation of young workers whose earning power and confidence have already suffered will decline even more.

"These are things slowly undercutting the underlying resilience of the economy," Harris said.

The likelihood of another recession has risen sharply since spring amid signs of deteriorating employment, manufacturing and business and consumer confidence — accompanied by wild swings on Wall Street.

Many analysts see at least a 1 in 3 chance of a fallback into outright economic decline in the next six months or so.

U.S. gross domestic product in the first half of this year is now seen as having grown by even less than the tiny 0.8% rate previously estimated. A negative GDP rate, which measures the change in goods and services produced, would be one sign that the nation is in recession. Another sign would be declining employment.

GDP expanded 3% in 2010, but the size of the U.S. economy still hasn't caught up to where it was at the fourth quarter of 2007 when the Great Recession hit. And total payroll employment remains nearly 7 million jobs shy of where it was at the end of 2007.

By comparison, China's GDP has surged more than 40% between 2007 and 2011, and economists at IHS now see the Chinese economy overtaking the U.S. in 2019 — much faster than what analysts were predicting only a few years ago.

The GDP comparisons are more than just academic. They also speak to economic clout and people's living standards, which for many in the U.S. have been further eroded in the last few years.

Little by little, economists have been ratcheting down their forecasts for the rest of this year. Layoffs and new jobless claims have been climbing again. And with the housing market still depressed, state and local governments cutting back and industrial production wavering, it's hard to see from where the U.S. economy could get a big lift.

Paul Dales, an economist at Capital Economics, said a second recession probably would be mild and short, if for no other reason than that the "fat-purging process" has already taken place.

During the Great Recession, many companies slashed payrolls and other costs, leaving them with lean inventories and much less excess staff and unused production capacity.

Take Darlene Miller, president of Permac Industries, a precision-machining shop in the Minneapolis suburb of Burnsville. Miller said her sales had returned to 85% of where they were before the recession. The firm has clawed back by becoming more productive and getting new certifications to build its aerospace and medical lines.

Over the long recovery, she has added just one net new employee, even though she cut a dozen positions during the recession.